China launches regulations to combat illegal REs

26 Nov 15 - Metals, Non-ferrous

The Chinese government has introduced new regulations on mining rights for rare earth and tungsten ores as part of efforts to curb illegal production activities and support the country's struggling producers.

The regulations, introduced on 23 November, are in line with China's existing resources policies, the ministry of land and resources said.

Under the new regulations, the government will stop accepting new mining registration applications for rare earth ores, except for specific projects that receive geological prospecting funds from the central government and state-run rare earth groups' prospecting projects that are administered and funded by provincial governments.

The government will supervise transfers and renewals of mining rights, impose quotas on the production of rare earth by-products and control rare earth waste recycling projects. Rare earths are still illegally produced in China through the recycling industry, with a number of registered rare earth recycling plants known to participate in unlawful mining and production activities.

The attempt to control production could raise concerns among importers that fear a repeat of the 2011 price spikes, which came about following the tightening of export quotas in 2010.

The new regulations have so far not been met with much resistance from rare earth market participants. An oversupplied market and prices that have fallen to their lowest since 2011 are still showing no signs of abating, as buyers continue to purchase in small quantities and bid at low levels.

Existing and emerging producers within China and abroad that are struggling to stay afloat will likely welcome the Chinese government's move to underpin prices. Rare earth prices have already fallen below production costs, particularly for widely available light rare earths such as cerium oxide and lanthanum oxide, which are now below $2/kg, down from peak of over $150/kg in August 2011. As a result, US rare earth mining and processing firm Molycorp, one of two rare earth producers outside of China, went into Chapter 11 bankruptcy protection in June and suspended operations at its Mountain Pass mine in August.

While the decline in rare earth prices is in line with the overall downturn in global commodities, higher prices that allow producers to operate sustainably are important to the long-term health of the rare earth industry.

China's six large rare earth producers — Chinalco, Northern Rare Earth, Xiamen Tungsten, China Minmetals, Guangdong Rare Earth and Southern Rare Earth — confirmed production cuts in October, as they have struggled to sustain operations in the low price environment. Further consolidation of the sector is likely if the six producers continue to struggle. Emerging rare earth projects outside of China would similarly struggle if prices continue to fall below costs. A sustained period of low prices would in the long term likely result in a market with even fewer producers, which would have significant consequences for buyers.

Impact of mining quotas

The Chinese government launched the rare earth mining quota system in 2006 to conserve strategic resources and prevent their exploitation. In 2014, China increased rare earth mining quotas by 12pc compared with 2013 to accommodate domestic producers with higher output capacity.

The mining quotas were rolled over this year, favouring the six large rare earth groups. But in an oversupplied market flooded with illegally produced material, the low prices this year have led producers to make production cuts of 5-10pc from their 2015 allocated mining quotas in an attempt to stabilise domestic prices and ease the supply imbalance.

The Chinese government allocates the mining quotas based on its interpretation of market demand. In view of low downstream demand and oversupply in the rare earth industry, the government may decrease mining quotas in 2016 to support prices.

But the root of cause of oversupply in the market is the production of illegal rare earths. Official production of 105,000 t/yr results in a production shortage of around 40,000-50,000t, according to industry estimates, creating a gap for illegal rare earths.

In addition to strengthening the government's supervision of rare earth mines, the new regulations are expected to lead to further consolidation of the domestic rare earth industry, as as large producers will be restricted from transferring mining quotas to small producers.

Stricter supervision of mining rights for rare earth ores will prohibit companies from privately selling their awarded quotas to mining companies that operate illegally. The move is also expected to tighten controls on smaller processing plants and benefit larger companies in the long run.

Pressure on illegal REs

Despite a series of campaigns by the Chinese government to crack down on the illegal production and sales of rare earths in recent years, unlawful output has increased, leading to oversupply and falling prices. China's illegal rare earth production is estimated to be over 40,000 t/yr.

With the recycling of rare earth waste products as one of the major factors that contribute to illegal supplies, the government is starting to focus its attention on recycling plants. Earlier this month, the ministry of industry and information technology launched a two-month crackdown on illegal rare earth production activities, particularly targeting the unregulated recycling of rare earth waste products.